A Little Guy's Marketplace

By Nick Pachetti

Ken Register needed help. Almost a year ago, the president of Heart-O-Dixie Animal Nutrition, a small chicken-feed maker in Montgomery, Ala., was looking to replace his long-distance carrier with a cheaper alternative. Otherwise, his phone bills would soon start to peck away at his bottom line. But with just two employees, Register couldn't afford to pull them from their day-to-day jobs to spend time calling carriers, requesting quotes and handling negotiations. "Phone service is one of the worst things to shop for," he says. "You have to read the fine print on everything."

Almost by accident, though, Register discovered he could find the answer without even picking up the phone. While browsing the Net one day, he clicked on a banner ad that directed him to Demandline, a digital marketplace where small businesses can get quotes for free on a wide variety of services from a network of suppliers. Register simply typed in a list of what he needed from a long-distance carrier, including two phone lines, a fax line and a toll-free number. Within a week, Demandline had auctioned his request to numerous suppliers, including AT&T and Qwest, and received a competitive bid from Cable & Wireless, which Register accepted. Just two weeks after placing his bid, Register saw results. "I've been saving about $200 a month with the new plan," he says. "That's substantial for a small company like ours."

For thousands of other entrepreneurs who are just making a go of it, that's not chicken feed either. Heart-O-Dixie is but one of a growing number of small businesses, from insurance companies to carpenters, that are turning to business-to-business (B2B) exchanges, or e-marketplaces, as a way to save money and gain leverage against large companies. In the past couple of years, dozens of websites have appeared that pool requests by small businesses and help them strike better deals with suppliers of products and services. Along with greater convenience, exchanges offer prices 15% to 25% lower than a small business can negotiate on its own. Whether for buying office supplies or looking for payroll processing, the Internet is helping level the playing field for small businesses.

Websites are bringing buyers and sellers together in a variety of ways, including cooperative purchasing and catalog buying. Some of the more popular exchanges use so-called reverse auctions to play matchmaker. Here's how they work: a prospective buyer completes a request-for-quote form, the exchange matches it with prequalified suppliers, and they submit a quote. Some exchanges let vendors see other bids while the auction is under way, and others reveal the winning bid to vendors only after the auction. Either way, buyers can choose the quote that best suits their needs.

Business models vary, but exchanges typically generate revenue by charging suppliers to submit bids and taking commissions on closed transactions. That's how BizBuyer.com works. Launched in June 1999 and based in Santa Monica, Calif., BizBuyer boasts more than 20,000 qualified vendors in 34 products and services, including telecommunications, insurance, legal services and business consulting. Buyers pay nothing. BizBuyer charges vendors a commission of up to 10% of the value of the transaction, depending on the service. Since its launch, BizBuyer has processed more than 40,000 requests worth in excess of $200 million. "Not only do we save small businesses time and money on the purchase," says BizBuyer founder and CEO Bernard Louvat, "but we eliminate all the what-ifs."

Steve Simpson is one of many converts to small-business Web services. Last February, Simpson co-founded Adoto, a Seattle-based manufacturer of software for online clothing retailers. With competitors breathing down his neck, he needed to hire staff quickly to ready his software for market. But he couldn't afford to pay someone to look for the help, let alone do it himself. Like Register, Simpson discovered BizBuyer through a banner ad. He put in a request for several programmers, and the following day got six prospective hires. In addition to locating qualified workers, he used BizBuyer to find companies that installed telephone and computer networks he also needed. "As a result, we were able to get to market twice as fast," he says.

Speedy procurement is just part of the appeal. There are other cost advantages. Because it's expensive to establish contact with small-business customers, vendors are willing to cover all the transaction costs. And letting vendors battle in cyberspace drives the price down for the buyer. At cyberspace auctions, vendors know they have competitors and make every attempt to offer the best price. Auction sites are placing an increasingly high priority on prequalifying vendors, screening out sketchy suppliers and creating an important safety net for small businesses. "Knowing vendors are qualified can save a lot of time and money," says Simpson. "In some cases, small businesses have only one chance to get it right."

Buyers and large vendors aren't the only firms tapping these exchanges; small-business sellers also recognize the benefits. For 15 years, Gordon Clotworthy's company, the Information Refinery, based in Mahwah, N.J., has sold marketing lists to small businesses in the Northeast, finding customers through costly direct mailings and trade-magazine ads. Earlier this year, Clotworthy discovered Onvia, a Seattle-based small-business exchange with more than 60,000 suppliers across 117 services. He signed up with Onvia, and receives one to 10 requests for lists a day and contracts at least once a week to businesses around the country. The Refinery's sales through Onvia average just under $600, with the biggest one to date $30,000. Onvia typically collects $3 a bid from the seller regardless of whether the bid is accepted--a small price to pay, Clotworthy says, for spending just 15 minutes a day online. "These sites guarantee a constant flow of customers for small businesses with limited budgets," he says. "That's critical."

While both small-business buyers and sellers seem to be profiting, it's not yet clear that the auction sites will stay in the black. For some products and services, like computer equipment and brochure printing, the margins are small, leaving little room for exchanges to profit. And then there's always the possibility that, like the big automakers, small businesses in the same field could band together and establish their own exchanges, relying less on the dotcoms. It's unlikely this will happen anytime soon, according to Melissa Shore, a senior analyst at Jupiter Research. "The reason proprietary exchanges work with the big automakers is that they dominate the marketplace and suppliers have to come to play," she says. "Small businesses still don't have enough power or money to make that happen."

There's no question the opportunities are there. Today there are more than 7.4 million small businesses in the U.S., and roughly 62% have a presence online. Most small businesses use the Internet only for e-mail, and a mere fraction have discovered online auctions. Business is expected to boom. Small businesses will account for approximately $118 billion in e-commerce in 2002, up from roughly $25 billion in 1999, according to AMI-Partners, a New York City-based Internet research firm specializing in small businesses.

Given that potential market and the fact that major business-procurement companies like Ariba and Commerce One have largely shunned the small-business market, it's no wonder that dozens of companies are vying for small-business dollars. Among these companies are EqualFooting, which helps small businesses get good deals on manufacturing supplies and equipment; SmallBusinessDepot, which specializes in matching small businesses with government contracts; and ebDirect, where small businesses can procure a variety of insurance plans, including health, dental, life and vision coverage.

That kind of niche strategy probably won't last long. There are simply too many me-too small-business B2B exchanges, and a shakeout is almost a foregone conclusion. Shore expects that, before long, a few megasites will probably emerge, each offering a soup-to-nuts array of services and products, including office pens and paper and 401(k) planning. Traditional financial players that work with small businesses, like Intuit or Merrill Lynch, are likely to swoop in and buy or partner with these megasites, adding their expertise and long-established relationships to the equation. "You want to be the one place small-business owners go, because once you have them you want to suck them dry," says Shore. BizBuyer CEO Louvat believes that only exchanges offering a range of services will thrive. "Like Wal-Mart, the one-stop shop is the wave of the future for exchanges," he says. Others disagree. When Demandline CEO Patrick Burns founded his company this year, he made a calculated decision to offer only services. "Telephone carriers pay just one penny for a call and charge 10[cents]," he says. "There are definitely higher margins in the service business."

Regardless of who is right, one thing is clear: the exchanges that get the early lead will hold it. Just like eBay, whose widespread network of buyers and sellers draws even more members and ensures its continuing dominance, the small-business exchanges with the most liquidity should remain on top. "The ability to find the transaction and complete it is the real issue," says Onvia CEO Glenn Ballman, whose company lost $43 million in 1999. "As long as we're able to bring enough buyers and sellers together, we'll survive." And small-business owners should be able to do better as a result.